HEALTHPEAK PROPERTIES, INC. quarterly report, Q2 FY2018

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Business context and reporting period

HCP, Inc. (the registrant named in the filing; the request metadata identifies Healthpeak Properties, Inc.) is a healthcare-focused REIT investing in senior housing, life science, medical office and related assets. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2018. Unless stated otherwise, amounts below are in U.S. dollars.

Financial performance and position

  • Revenue: Second-quarter revenue was $469.6 million, up 2.3% from $458.9 million. First-half revenue was $948.7 million, down slightly from $951.1 million. Lower interest income was a major offset to property revenue growth.
  • Profit and per-share results: Second-quarter net income attributable to HCP was $89.9 million and net income applicable to common shares was $89.5 million, or $0.19 per diluted share, versus $19.4 million, or $0.04, a year earlier. First-half common-share net income was $129.3 million, or $0.28 per diluted share, versus $479.9 million, or $1.02, in 2017. The prior-year comparison benefited from substantially higher real-estate sale gains.
  • REIT supplemental measures: Second-quarter FFO was $209.9 million ($0.45 per diluted share), FFO as adjusted was $219.5 million ($0.47 per diluted share), and FAD was $190.1 million. First-half amounts were $429.3 million ($0.91 per diluted share), $446.9 million ($0.95 per diluted share), and $391.8 million, respectively. These are non-GAAP measures and are not substitutes for GAAP results or operating cash flow.
  • Property operations: Second-quarter same-property adjusted NOI increased 0.7% in senior housing triple-net, 0.5% in life science and 2.5% in medical office, but declined 4.4% in SHOP. Management cited SHOP occupancy declines and higher labor costs; increased resident rates partly offset these pressures. Life science same-property occupancy was 95.0% for the quarter, compared with 96.0% a year earlier; medical office occupancy was 92.0%, compared with 92.5%.
  • Cash flow and investment: First-half operating cash flow was $439.7 million, compared with $431.6 million. Investing activities provided $491.8 million, largely reflecting asset and investment proceeds, while financing activities used $891.7 million, including $348.4 million of common dividends. Cash, cash equivalents and restricted cash totaled $121.9 million at June 30.
  • Debt and liquidity: Debt carrying value totaled approximately $7.31 billion at quarter-end: $545.2 million on the revolving line, $222.9 million on the term loan, $6.40 billion in senior notes, $140.3 million in mortgage debt and $93.1 million of other debt. The $2.0 billion revolving facility had $545.2 million drawn. HCP reported compliance with its credit-facility and term-loan covenants. Approximately 90% of consolidated debt was fixed-rate. Total equity was $5.42 billion.
  • Dividend: HCP declared $0.37 per common share for the second quarter, unchanged from the prior-year quarter. First-half declared dividends were $0.74 per share.

Material changes versus the prior comparable period

  • Second-quarter GAAP earnings rose year over year, helped by higher real-estate sale gains, property NOI growth in certain segments, lower interest expense and lower impairment charges. First-half GAAP earnings fell sharply, mainly because 2017 included much larger real-estate sale gains and a gain on the Four Seasons notes; 2018 also included a $41.0 million loss on consolidation of seven U.K. care homes.
  • First-half FFO, FFO as adjusted and FAD declined from 2017. First-half adjusted FFO was $446.9 million versus $464.9 million, and FAD was $391.8 million versus $418.7 million. Management cited SHOP operating pressures, lower interest income and lower CCRC entrance fees, among other factors.
  • Brookdale exposure was being reduced under a transaction and cooperation agreement. HCP transitioned 24 assets from Brookdale to other operators during the first half and agreed to sell 22 additional Brookdale-related properties for $428 million; closings were expected in the third and fourth quarters.
  • HCP completed a U.K. joint venture transaction, selling a 51% interest in substantially all U.K. assets, retaining 49%, and recognizing an $11 million gain. It also sold its remaining RIDEA II interest and received refinancing proceeds on related loans.
  • Net real estate declined to $10.0 billion from $10.7 billion at year-end 2017; assets held for sale increased to $692.7 million from $417.0 million. The balance sheet also recorded $402.4 million receivable from the U.K. JV escrow, received on July 2.

Outlook, management commentary, risks and unusual items

  • Management expected operating cash flow, available cash and financing sources to be adequate for at least the next 12 months to fund operations, debt service and distributions. No numerical full-year earnings or FFO guidance is provided in the supplied filing text.
  • Management identified investment and development spending as principal funding needs and cited asset sales, credit facilities, debt issuance and equity issuance as potential funding sources. Development and redevelopment commitments rose by $142 million to $276 million at June 30.
  • After quarter-end, HCP repaid $700 million of 5.375% senior notes due 2021, primarily using U.K. JV and asset-sale proceeds, and expected a third-quarter debt-extinguishment loss of approximately $44 million. It also converted its £169 million term-loan balance to a $224 million U.S.-dollar borrowing.
  • Key operating and portfolio risks include tenant and operator creditworthiness, concentration in healthcare and senior housing, SHOP occupancy and labor costs, Brookdale transition execution, development costs and timing, regulatory changes, access to capital, interest rates and foreign currency exposure. Brookdale represented 8% of total assets at June 30; management expected this concentration to decline as transactions close.
  • HCP recorded $13.9 million of first-half impairment charges, including write-downs on two SHOP portfolios classified as held for sale and an undeveloped life-science land parcel. It also reported $38.6 million of first-half other expense, including the U.K. care-home consolidation loss.
  • Shareholder securities and derivative actions related to historical HCR ManorCare disclosures remained pending. HCP said it intended to defend the claims; it could not estimate a potential loss and recorded no loss contingency.
  • The company adopted new revenue-related accounting guidance on January 1, 2018, recording a $79.1 million cumulative-effect adjustment to equity. It was evaluating lease-accounting adoption for January 1, 2019; the complete impact was not yet determined.

Important facts for investors to verify

  • Whether the $428 million Brookdale-related sale agreements closed as expected and how much Brookdale tenant and operator exposure remained afterward.
  • SHOP occupancy, labor costs and same-property NOI trends, and whether operating pressures persisted beyond the quarter.
  • Cash available after the post-quarter $700 million note repayment, subsequent asset-sale proceeds and remaining debt maturities, especially the term loan due in 2019.
  • Whether first-half FAD and operating cash flow support the dividend after recurring capital spending and other cash requirements; FAD is a non-GAAP measure.
  • Final proceeds, gains or losses, and retained-investment effects from the U.K. JV and other planned dispositions, along with any material outcome in the pending litigation.